Partnership agreement using one partner's credit
Hi BP,
I'm looking for any partnership agreement templates, language, or general advice regarding an owner-occupied multifamily investment I am about to begin with a lifelong friend. Most of this pertains to contract considerations, but also curious how you would suggest tax benefits to be structured and how we should take joint title to the property (through business name, tenancy in common, etc). We will both be living in one unit and renting out the others.
The most important point to consider is though I trust my friend IMMENSELY, he has poor credit and has some debt issues so the property will be financed in my name -- we do NOT want creditors to be able to come after this property. Given that, we are flexible with the legal/tax structure but obviously would like us to have as equal rights as possible.
Below are the contract ideas we have to-date:
1) FINANCING
Property will be fully financed in my name, but we both will be equally invested, splitting all expenses 50/50. To compensate for my credit risk, we agree I will take all the tax benefits (mortgage interest deduction, depreciation, etc).
2) BUYOUT/ONE PARTNER EXIT
In the event of a buyout, ex-partner will be repaid their initial contribution at a rate of at least $500/mo until paid-off (provided the property turns a profit). If property is at a loss, remaining partner will not be required to repay ex-partner for his loss; however the remaining partner must repay the ex-partner once the property returns to profits or is sold (whichever occurs first).
a) NON-AGREED DEBT
If non-agreed debt to other partner exceeds $10,000, the partner owed has an option to notify other partner of a forced buyout, were he will contractually assume all rights to the property within 60 days.
b) NON-PARTICIPATION DUE TO ILLNESS
If a partner ends up extremely ill and unable to invest, the ill partner has option of forcing the other partner to buy him out.
c) NON-AGREEMENT
If partners cannot agree on an amicable solution to the property through a buyout situation, the property will be sold and all profits/losses split equally.
3) JOINT BANK ACCOUNTS
a) GENERAL PROPERTY REVENUES/EXPENSES
One shared business checking account to be funded via tenant rents. This account will be the first source of all property expenses. This account will grow without partner income deductions anytime its balance is less than $10K (or otherwise agreed upon amount).
b) PROPERTY RESERVE ACCOUNT
One shared business savings (reserve) account to be funded via deposits of $500/mo/partner for a total of $1K/mo. This account will grow without deductions anytime its balance is less than $10K (or otherwise agreed upon amount). This account will be the second source of all property expenses.
6) INVOICE PAYMENT
Invoices to be paid within 7 days before due from the business checking account. If for any reason one partner agrees to pay balance, indebted partner agrees no profit will be taken until other partner paid back.
7) DIY REHAB/REPAIRS
Generally good faith that we will participate equally, but if becomes an issue we will start getting quotes and use an agreed labor cost to account for value.
Some of this might be best structured with an LLC; however, we are debating an LLC vs an umbrella insurance policy as the majority of our assets will be tied to the property -- meaning the LLC would not protect us from much. I'm leaning towards an umbrella at the time-being. Please let me know your thoughts!
Thanks,
Tony
(Before anyone shares their opinion that this is a terrible idea, please give alternative options if you desire to do so).